Operator: Hello, everyone. Thank you for joining the WisdomTree weekly call with Professor Siegel. Please visit our website, WisdomTree.com, for additional insights, including the recordings of these calls. Today, Professor Siegel will provide a quick 15-minute update, and then we will open the lines for your questions. Please note that this call is being recorded. If you need assistance, dial *0, and an operator will be happy to assist you. With that, I will hand the line to Professor Siegel.
 

Professor Siegel: Thank you, Jaclyn, and welcome again to our weekly commentary. Lots of things going on. First of all, for some of the new participants, and even some of the old ones, I'd like to reiterate our broad view. It was very soon after the deepest part of the bear market in late March that I saw the liquidity provided by the federal reserve was unprecedented, and far greater in magnitude than even provided during the financial crisis.

Not only did I see the Fed increasing the balance sheet, its own balance sheet, and the excess reserves of the banking system, which it did in 2009 and 10, but also saw an unprecedented jump in the money supply. The M1, M2 money supply. This includes checking accounts, payroll accounts, transactions accounts, money accounts. I quickly concluded that this dramatic burst of liquidity was going to stimulate stocks, financial markets, and the economy once the fears of the pandemic subsided.

So far, the markets are playing out this scenario almost perfectly. I was particularly interested. Brian Moynihan, CEO of Bank of America, was speaking last week on CNBC, and he mentioned that the checking accounts of his low income, low balance individuals had jumped 15 to 20% above what they were a year ago. He implied that he had never seen that sort of an increase. These are not the wealthy clients.

This increase in the money supply is not just corporations that are growing down on their lines of credit. This is as a result of the Cares Act, the Payroll Protection Program, and other programs that are directly putting cash into the pockets of consumers. This is what is driving the markets, and I believe, as I've mentioned before, as the economy opens up in 2021, that it'll lead to a very strong economic recovery. That being said, this is a shock to the economic system that's going to cause a tremendous amount of realignment of the labor force. Firms are finally going to decide, I don't need some of these people. Firms are going to decide, I don't need this amount of business travel. Firms are going to decide, we can have a certain percentage of these people working from home.

This reallocation could be associated with a dramatic rise in productivity, believe it or not, measured productivity, but it's also going to be hardship because a lot of people who were employed because profits were good and times were good, firms can now see, oh, we don't have to keep these people. These people will have to find new jobs, and that's not always going to be easy, even in a booming economy. It depends on the level of training. It depends on reallocation.

There's going to be a burst of productivity, a burst of cost saving. This is good for profits, but also a burst of unemployment. Hopefully we will have, as we did in the 2008, nine financial crisis, extensions of unemployment insurance that will abide these people over a longer period of time. Now, we don't want necessarily, in my opinion, to continue the $600 bonus on top of the regular unemployment. As mentioned before, that brought the wage rate, the amount of unemployment above the average amount of what the actual laid off employee was earning in over 50 States of tubing, and over 50% of the states in the United States, and provide strong disincentives to go back to work.

Now, once that ends, one has incentives again, but then the firms may again decide, we don't want them. Nonetheless, despite all that, there is enough power, purchasing power, that I think is going to drive the recovery in the markets. We now have at least temporarily stabilized earnings estimates for the S&P 500. Now, there's a lot of uncertainty, and these are, of course, based on estimates. They're based on renewed lockdown, which is not a certainty, but the current estimate is a fall of 30% in operating earnings of the S&P 500 this year, in 2020.

This is actually less than I had originally feared, and it actually reflects the fact that the stock market is not the economy. Stock market is the big firms and the tech firms that benefit very well from some of the problems we're having. The most harmed part of the economy are firms that have no market value because they're not public. This has been mentioned before. Many of you might've seen, I was extensive, we quoted in the New York times magazine section about why is the stock market so high while the economy are suffering at levels not seen in 75 years? This is one of the reasons.

We do have estimates for 2021. I don't believe any of them. They're 3%, but they're 3% higher than what they were last year. Let me just give you a rule, not a rule of thumb, if you do the math on valuation of a stock, which is an infinite term asset or long-term asset, one year drop of 30% in the earnings, and then go back to normal after that. That should result in a three to 4%, at most, drop in the stock price.

Just to tell you, you discount all the cash flows, one year is 30% less, the next year goes back to normal. Then you have just regular growth after that. Has less than 5% significance in the price of the staff. Now, there's a lot of assumptions in that. Clearly, one of those assumptions is do we go back to normal in 2021? Or not? Obviously, that that extra risk is, it's certainly one thing the stock market has to contend with. That does go back to the question of the vaccines. We did get a final run on the remdesivir trials. Pretty much similar to what had been already given, it is statistically significant at the five day dose. It's not a cure. It's not a dramatic improvement, but it does make a difference.

Remdesivir, as an antiviral in general, as you know, first actually developed for Ebola, antivirals generally work very early on. Not when you're in the hospital. There are a number of vaccines that are, excuse me, not vaccines. There is number of antivirals that are being developed as sprays early on when people begin to think they may have symptoms, which could be much more effective that are patterned after some of these same suppressants that are present in remdesivir. They may be more effective.

Again, nothing dramatic, but it's the first now new drug designed to ameliorate the impact. There's something else that ... a very interesting article actually by Justin Fox. He's a good writer that actually writes as a regular for Bloomberg. I think one of the smartest guys. This coronavirus, everyone talks about the infectivity of it. With the coefficient R-naught, which is how many individuals an infected individual infects. You need that number to be less than one to have a virus die out on its own. Early studies estimated that R-naught of the COVID-19 was between two and two and a half, which is very much higher than average influenza, nothing like a measles chickenpox, the older infectious diseases, but still very hot. New evidence is quite interesting. There is new evidence, a study in Israel and several other studies that say that the R0 for over 90 to 95% of the individuals is less than one. And then you have, and I know you've heard this term called the super spreaders. There are some people for reasons we don't quite understand yet that can spread it to 40 or 50 people, and that is why we get these outbreaks. And I looked at the pattern of virus infections very closely around the world, it is not like a typical viral epidemic. It peaked and then died out with humps that come up every now and then and that is exactly what's called the super spreader type of infectivity. The good news about super spreader infectivity is that it is much easier to control and stamp out then would be a virus with a 2.5% normal R0 spread coefficient.

So, the hope reopening that you see reopening most is good and then all of a sudden you see these spikes. If we can identify there might be actually genetically to identify super spreaders, but if we can clamp down and several countries out, as soon as they identify with testing, then they isolate and are able to take care of these people. Anyways, it is as experts say, this is actually a very good development. Som there's something called the K, the skewness of the infectivity is very high. This has actually been seen for other coronaviruses. It is very different than the influenza virus. I know this might sound geeky, but it is really important in terms of how to interpret virus patterns as our economy opens up. We also see worldwide, we don't see in the United States, really much of a decline now.

I mean, areas in the Northeast are really declining. The mid Atlantic has really declined. New York, as we all know, declining, declining really sharply, deaths and all the rest. The rest of the country not as much, but death rates are declining and part of the reasons for that is even before remdesivir, we're learning about how to treat a COVID-19 patients that have to go to the hospital. Treatments with blood thinners to prevent clots, ways to administer oxygen, avoiding ventilators early on. We're just understanding things a lot better. We are reducing the death rate without drugs of those that are even hospitalized as a result of infection, which is another very favorable outcome.